Offshoring your manufacturing and perhaps, also your engineering design is a practical business model. The most compelling reason for offshoring is the cost advantages which lead to higher profitability. In the 1980’s and 1990s, the combination of globalization, economic incentives, favorable trade policies and access to a large skilled cheap labor pool paved the path for the exodus of the manufacturing sector from higher cost markets, like Canada and the US, North America to lower cost markets like China.

Over the past decades, we enjoyed the benefits of lower costs due to offshoring. For businesses it translated to higher profitability and for consumers, lower prices at the checkout. But the permanent loss of jobs, facilities and the dismantling of manufacturing infrastructure due to the mass migration had a significant, long-term impact on our economy that is challenging to restore and reshore.

Whether contracting manufacturing overseas or migrating your manufacturing offshore, OEMs should consider a careful evaluation of the benefits and challenges of offshoring.

Advantages of Offshoring

• Well-Established Supply Chain
  Easy access to standard and custom components in developed offshore markets, like China, is advantageous to reducing production lead time, meeting demand, and managing costs.
• Access to an Abundant Skilled Labor Force
  China, the world’s manufacturing hub, has a labor pool of approximately 800 million people which includes those employed and those actively seeking work while the size of the USA’s labor force is only 150 million people. The Government, local communities and industries that support and heavily invest in higher education, vocational training programs, research and development and innovation help develop a robust skilled workforce.
• Lower Labor Costs
  Labor costs are a major component of the total manufacturing expenses. In North America, they account for about 20% to 30% of total manufacturing costs, compared to 10% to 20% in China. Higher minimum wages, payroll expenses, like social security taxes, unemployment insurance, and labor laws that mandate overtime pay, paid leave, vacation etc, drive up costs in North America. China and other overseas destinations, on the other hand, have fewer such regulations and lower mandatory labor-related taxes making them more cost competitive.
• Flexible Workforce
  With a larger labor pool, offshore locations may also offer more flexible labor arrangements, such as contract or temporary labor, which can be a cost-effective alternative to hiring permanent employees that come with mandatory payroll related expenses.
• Lower Risk of Labor Unions
  In many Southeast Asian countries, unions are less prominent or have limited influential power. Labor laws and union activities are less developed and more regulated, minimizing the risk of business disruptions. Countries with developed economies, strong labor leaning government policies, high-level of organized and structured market conditions tend to foster and empower unionization. For this reason, North American manufacturing could be more costly due to its stronger union bargaining power.
• Access to Specialized Skills
  Certain regions may have a high concentration of skilled workers or specialized technology not available locally. For example, some regions may focus on becoming the hub for experts in mass production techniques, assembly line operations, developing new cost-efficient manufacturing practices and integrating emerging technologies such as robotics. By developing core competencies in specific areas, they can move up the value chain.
• Lower Overhead Costs
  Fixed factory expenses, or overhead costs, include rent, utilities, property taxes and other facility-related expenses. In North America, fixed overhead costs account for 20% to 40% of the total manufacturing cost while in China, they represent about 10% to 30% due to lower facility costs and fewer regulatory requirements.North American factories face additional compliance costs related to legal, health, safety, and environmental regulations. In addition, they must invest in mandatory training and certification to meet specific government imposed regulatory standards. The mandatory requirements to operate a business in North America drive overhead costs beyond those of overseas countries.
• Technological Advancements
  Offshore countries, like China, that invest in advanced manufacturing technology such as automation and digital manufacturing, can achieve significant operational efficiency and productivity that results in lower unit costs. Advanced technology enables more seamless supply chain operations, making offshoring a more attractive and cost-effective option.
• Tax Advantages and Economic Incentives
  Offshore countries may offer tax breaks, subsidies and other financial incentives reducing the overall tax burden, enhancing profitability, and improving competitiveness. These benefits allow manufacturers to allocate resources more effectively and expand more economically.
• Cheaper Material Costs
  In some cases, the cost of raw materials and components may be lower in offshore locations. Access to a larger network of established component and material suppliers overseas allows manufacturers to source locally at more competitive prices, resulting in cost savings for OEMs.
• Economies of Scale
  The availability and access to large-scale manufacturing operations overseas can benefit large and small OEMs. Through consolidation of smaller manufacturing runs, a manufacturer can achieve economies of scale providing a more competitive unit cost.
• Scalability
  Offshore locations can often handle large-scale production more efficiently due to established infrastructure. Access to a large labor force, advanced manufacturing technology, and an abundance of lower cost facilities, can help OEMs scale and seize market expansion opportunities.

Disadvantages of Offshoring

• Quality Control Issues
  With the distance of offshore facilities from the North American OEMs, inspections and quality control is challenging. The ability to monitor and inspect product processes makes it difficult to ensure consistency in materials and quality standards.
• Supply Chain Complexity
  Given the distance from OEM markets, logistics can be more complex and lead times can be longer. Longer lead times can pose potential risks to supply chain efficiency and effective inventory management. Customs regulations and tariffs can also add to the cost of importing the products to the market.
• Communication Barriers
  Communication barriers arising from cultural differences due to language and business practices can cause miscommunication and hinder effective communication between teams. The time zone difference between Asia and North America also creates a different type of communication barrier. The misalignment of working hours can cause delays in decision making and problem resolution.
• Intellectual Property Protection
  Many OEMs are concerned about the risks of theft or counterfeiting of intellectual property when manufacturing overseas. In countries with weaker IP (Intellectual Property) protection laws, these risks are higher and enforcing IP rights can be both challenging and costly in foreign jurisdictions.
• Economic and Political Instability
  Manufacturing in countries that demonstrate political or economic instability can pose risks to business continuity and supply chain stability. Changes in trade policies and geopolitical tensions can also impact the cost advantages and feasibility of offshoring manufacturing.
• Unexpected Hidden Costs
  Unexpected costs can come in the way of additional logistics expenses because of supply chain disruption and quality control. There could also be unforeseen expenses in training and development required to align offshore manufacturing practices with company standards.

Weighing the Benefits against Challenges

The advantages of offshoring are driven largely by lower labor costs, access to a large pool of skilled talent, reduced overhead and regulatory expenses, tax incentives, and economies of scale. Companies that offshore manufacturing aim to capitalize on these savings to enhance profitability and compete more effectively in global markets. However, these advantages are increasingly being scrutinized as factors such as rising labor costs, supply chain risks, and changing consumer preferences influence manufacturing strategies.

Nonetheless, the decades of investment in the offshore regions will make it difficult for North America to catch up and compete against the established infrastructure in offshore markets. Despite the protectionist approach in support of the growing negative sentiment towards offshoring, many OEMs in North America are still not convinced that reshoring is a viable option for them in the long term.

Offshoring concerns regarding IP protection, quality control, communication barriers and supply chain can be easily allayed by enlisting an OEM partner, like Avnan, who can manage the end-to-end manufacturing process offshore.

If you would like to compare the various manufacturing strategies and their pros and cons, download this table.